The story of this week:
The Fed Backs Down- Good News For Commodities?
On Wednesday, March 20, the FOMC surprised markets across all asset classes with an unusually dovish posture towards monetary policy. The Fed lowered their projection for GDP growth to 2.1% and left the short-term Fed Funds interest rate unchanged. They told markets they do not plan to hike rates again until 2020, and only foresee one 25 basis point increase next year. At the same time, the central bank told markets that their program of balance sheet normalization would end in September which will take upward pressure off interest rates further out on the yield curve. While markets were looking for a more dovish Fed, it got a lot more accommodation than it had expected.
The kneejerk reaction was a weaker dollar, stronger bonds, and higher commodity prices. The yield curve inverted which caused pressure on bank stocks. However, on Friday, poor economic data from Europe combined with renewed worries over trade and tariffs and slower economic growth in the US to send stocks lower during the final session of the week.
Crude oil moved lower with stocks along with copper, lumber, and some of the other industrial commodities. Meanwhile, floods across the Midwest and outbreaks of African swine flu in Asia kept grain prices stable and sent lean hog futures significantly higher. Lean hog futures prices moved almost 22% higher over the past two weeks.
The daily chart of active month June futures shows that lean hogs are now approaching the $1 per pound level for the first time since 2014 when PED killed over seven million suckling pigs.
Typically, a dovish Fed would weigh on the dollar, support stocks, bonds, and commodities prices. However, the market’s reaction to the surprise at the March FOMC meeting is a sign that risk has increased. Trade, Brexit, and a myriad of other factors could contribute to market volatility over the coming week. With the potential for higher price variance, keep stops tight and take those profits when they are on the table.
The jury is still out as to whether the Fed’s latest move is bullish for commodities prices. The raw material asset class is waiting for news on the trade front from both the US and China.
This week’s report incorporates the price action since Friday, March 8, 2019.
Highlights in commodities:
- Precious metals higher- PGMs lead the way
- Copper falls below $2.85 level on concerns over the global economy
- Crude oil, products, and natural gas edge lower
- Hogs explode on African swine flu while floods in the US could push the planting season to later dates
- The dollar index edges lower while digital currencies move a touch higher
- Gold posts a 1.00% gain over the past two weeks
- Silver moves 0.48% higher since March 8
- Platinum rallies 3.77% and was trading at a $463.90 per ounce discount to gold
- Palladium gains 3.87% over the period
- May copper declines 1.76% and settles at just below $2.85 per pound on the May futures contract
- April iron ore futures up 2.01%
- The BDI recovers 5.78%
- Rotterdam coal drops 7.22% over the past two weeks
- May lumber down 7.18% as the price moves below the $370 per 1,000 board feet level
- May NYMEX crude oil moves 4.72% higher since March 8 but trades lower on Friday, March 22 with stocks
- May Brent crude oil underperforms WTI as it rises only 1.93% over the period
- The premium for Brent over WTI in May closes Friday at the $8.00 level down $1.34 since March 8
- May gasoline moves 5.11%, higher while May heating oil futures down 1.23% since last week reflecting seasonal factors
- The gasoline crack spread in May moves 5.42% higher while the May heating oil crack falls 13.55% since March 8
- Natural gas falls 3.91% on April futures and closed the week at $2.753 per MMBtu level. The EIA reported a withdrawal of 47 bcf out of storage on Thursday for the week ending on March 15
- May ethanol rebounds 8.59% over the past two weeks
- May soybeans move 0.89% higher since March 8
- May corn rises 3.84% over the period
- CBOT May wheat recovers 6.03% since two weeks ago. May KCBT wheat trading at a 21 cents discount under CBOT wheat 12.25 cents lower than last week which is a warning sign for wheat
- May sugar up 3.2% over the period
- May coffee falls 4.67% since last week’s report as the price closes under 94 cents per pound
- May cocoa moves 1.77% lower as the price is below the $2200 per ton midpoint level
- May cotton gains 4.20% since March 8
- March FCOJ futures rebound 11.8% over the past two weeks
- June live cattle move 2% higher
- May feeder cattle up 3.72% since March 8
- June lean hog futures explode 21.96% higher on fears of African swine flu shortages
- The March dollar index futures contract down 0.66% over the period
- June Long-Bond futures trading at around 148-25 up 2-28 for the week on the Fed, and concerns over global economic weakness
- The Dow Jones Industrial Average closes at 25,502 on Friday, March 22, up 52 points from two weeks ago. The VIX moves 0.45 higher and was trading at 16.50 on Friday
- Bitcoin trading at $4,032.68 Friday up $107.34 or 2.73% since last week as the crypto moved over the $4000 level
- Ethereum was trading at $138.11 on Friday, up just 0.33% since the last report
Price Changes for the week:
DBC closes at $15.94 per share, up 17 cents per share since two week’s ago
DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.8 billion and trades an average daily volume of 1,927,680 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy.
Have a great weekend!
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.